Chapt 8 Heizer Om10-Location)

16/10/2013
Outline Continued
Location Strategies
Methods of Evaluating Location

Alternatives
The Factor-Rating Method
PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
Locational Break-Even Analysis

Center-of-Gravity Method
Transportation Model
PowerPoint slides by Jeff Heyl
2011 Pearson Education, Inc. publishing as Prentice Hall
8-1
Outline
8-4
Outline Continued
Service Location Strategy
Global Company Profile:

FedEx
How Hotel Chains Select Sites

The Call Center Industry
The Strategic Importance of

Location
Geographic Information Systems
8-2
Outline Continued
8-5
Learning Objectives
Factors That Affect Location

Decisions
When you complete this chapter you

should be able to:
Labor Productivity
Exchange Rates and Currency Risks
1. Identify and explain seven major factors

that effect location decisions
Costs
2. Compute labor productivity
Political Risk, Values, and Culture
3. Apply the factor-rating method
Proximity to Markets
4. Complete a locational break-even

analysis graphically and mathematically
Proximity to Suppliers
Proximity to Competitors (Clustering)
8-3
8-6
16/10/2013
Learning Objectives
Location Strategy
When you complete this chapter you

should be able to:
One of the most important decisions a

firm makes
5. Use the center-of-gravity method
Increasingly global in nature
6. Understand the differences between

service and industrial-sector location
strategies
Significant impact on fixed and

variable costs
Decisions made relatively infrequently
The objective is to maximize the
benefit of location to the firm
8-7
Federal Express
Location and Costs

Location decisions based on low
cost require careful consideration
Central hub concept

Enables service to more locations with
fewer aircraft
Enables matching of aircraft flights with
package loads
Once in place, location-related

costs are fixed in place and
difficult to reduce
Reduces mishandling and delay in

transit because there is total control of
packages from pickup to delivery
Determining optimal facility

location is a good investment
8 - 10
8-8
Location Strategy
8 - 11
Location and Innovation

Cost is not always the most important
aspect of a strategic decision
The objective of location strategy is

to maximize the benefit of location
to the firm
Four key attributes when strategy is

based on innovation
High-quality and specialized inputs
An environment that encourages
investment and local rivalry
A sophisticated local market
Local presence of related and
supporting industries
8-9
8 - 12
16/10/2013
Location Decisions
Location Decisions
Site Decision
Key Success Factors
Long-term decisions
1. Site size and cost
Decisions made infrequently
2. Air, rail, highway, and

waterway systems
Decision greatly affects both fixed

and variable costs
3. Zoning restrictions
4. Proximity of services/
supplies needed
Once committed to a location,

many resource and cost issues
are difficult to change
5. Environmental impact
issues
Figure 8.1
8 - 13
Key Success Factors

1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
currency risks
Figure 8.1
8 - 14
MN
2009 Rank
1
2
8
9
13
27
29
48
49
60
63
2005 Rank
4
1
10
13
9
23
48
38
22
59
53
Table 8.1
8 - 17
Key Success Factors
Labor productivity
1. Corporate desires
2. Attractiveness of region
Wage rates are not the only cost
3. Labor availability and costs
Lower productivity may increase total cost
4. Costs and availability of utilities
WI
IL
IN
Labor cost per day

= Cost per unit
Productivity (units per day)
5. Environmental regulations
MI
OH
6. Government incentives and

fiscal policies
7. Proximity to raw materials and
customers
Figure 8.1
Country
Switzerland
USA
Japan
Canada
UK
Israel
China
Italy
India
Mexico
Russia
Factors That Affect

Location Decisions
Location Decisions
Region/
Community
Decision
8 - 16
Global Competitiveness
Index of Countries
Location Decisions
Country Decision
8. Land/construction costs
8 - 15
Connecticut
Juarez
$70
= $1.17 per unit
60 units
$25
= $1.25 per unit
20 units
8 - 18
16/10/2013
Factors That Affect

Location Decisions
Ranking Corruption
Rank
Country
1
New Zealand
2
Demark
3
Singapore, Sweden
5
Switzerland
8
Australia, Canada, Iceland
12
Hong Kong
14
Germany
17
Japan, UK
19
USA
37
Taiwan
39
South Korea
56
Malaysia
79
China
89
Mexico
146 Russia
Exchange rates and currency risks

Can have a significant impact on costs
Rates change over time
Costs
Tangible - easily measured costs such as
utilities, labor, materials, taxes
Intangible - less easy to quantify and
include education, public transportation,
community, quality-of-life
8 - 19
Factors That Affect

Location Decisions
2009 CPI Score (out of 10)

9.4
Least
9.3 Corrupt
9.2
9.0
8.7
8.2
8.0
7.7
7.5
5.6
5.5
4.5
Most
3.6
3.3 Corrupt
2.2
8 - 22
Factors That Affect

Location Decisions
Exchange rates and currency risks
Proximity to markets
Can have a significant impact on cost

Location
structure
Very important to services

JIT systems or high transportation costs
may make it important to manufacturers
decisions
Rates change over
time
based
on
costs
alone
Costs
can create
Tangible - easily measured costs such as
difficult
ethical
utilities, labor, materials,
taxes
Intangible - less easysituations
to quantify and
Proximity to suppliers
Perishable goods, high transportation
costs, bulky products
include education, public transportation,

community, quality-of-life
8 - 20
Factors That Affect

Location Decisions
8 - 23
Factors That Affect

Location Decisions
Political risk, values, and culture
Proximity to competitors
National, state, local governments

attitudes toward private and intellectual
property, zoning, pollution, employment
stability may be in flux
Called clustering
Worker attitudes towards turnover, unions,

absenteeism
Found in both manufacturing and service

industries
Often driven by resources such as natural,

information, capital, talent
Globally cultures have different attitudes

towards punctuality, legal, and ethical
issues
8 - 21
8 - 24
16/10/2013
Factor-Rating Method
Clustering of Companies
Industry
Wine making
Software firms
Race car
builders
Locations
Popular because a wide variety of factors

can be included in the analysis
Reason for clustering
Napa Valley (US)

Bordeaux region
(France)
Natural resources of
land and climate
Silicon Valley,
Boston, Bangalore
(India)
Talent resources of
bright graduates in
scientific/technical
areas, venture
capitalists nearby
Huntington/North
Hampton region
(England)
Critical mass of talent

and information
Six steps in the method

1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score
Table 8.3
8 - 25
Industry
Locations
Theme parks
(Disney World,
Universal
Studios)
Orlando, Florida
Electronics
firms
Northern Mexico
Computer
hardware
manufacturers
Singapore, Taiwan
Factor-Rating Example
Key
Success
Factor
A hot spot for

entertainment, warm
weather, tourists, and
inexpensive labor
High technological
penetration rate and
per capita GDP,
skilled/educated
workforce with large
pool of engineers
Totals
Industry
Locations
Sites within 1 mile
of each other
Weighted Scores
France
Denmark
.25
70
60
(.25)(70) = 17.5 (.25)(60) = 15.0
.05
50
60
.10
.39
85
75
80
70
(.10)(85) = 8.5
(.10)(80) = 8.0
(.39)(75) = 29.3 (.39)(70) = 27.3
.21
60
70
(.21)(60) = 12.6 (.21)(70) = 14.7
(.05)(50) = 2.5
1.00
(.05)(60) = 3.0
70.4
68.0
Table 8.4
8 - 26
8 - 29
Locational
Break-Even Analysis
Fast food
chains
(Wendys,
McDonalds,
Burger King,
and Pizza Hut)
Scores
(out of 100)
Weight France Denmark
Labor
availability
and attitude
People-tocar ratio
Per capita
income
Tax structure
Education
and health
NAFTA, duty free

export to US
Table 8.3
8 - 28
Method of cost-volume analysis used for

industrial locations
Stimulate food sales,

high traffic flows
Three steps in the method
General aviation Wichita, Kansas

aircraft
(Cessna,
Learjet, Boeing)
Mass of aviation skills
Orthopedic
device
manufacturing
Ready supply of skilled

workers, strong U.S.
market
Warsaw, Indiana
1. Determine fixed and variable costs for

each location
2. Plot the cost for each location
Table 8.3
3. Select location with lowest total cost for

expected production volume
8 - 27
8 - 30
16/10/2013
Locational Break-Even
Analysis Example
Place existing locations on a
coordinate grid
Three locations:
Selling price = $120
Expected volume = 2,000 units
Grid origin and scale is arbitrary
Fixed Variable
Cost
Cost
$30,000
$75
$60,000
$45
$110,000
$25
City
Akron
Bowling Green
Chicago
Maintain relative distances
Total
Cost
$180,000
$150,000
$160,000
Calculate X and Y coordinates for

center of gravity
Assumes cost is directly
proportional to distance and
volume shipped
Total Cost = Fixed Cost + (Variable Cost x Volume)

8 - 31
Annual cost
Locational Break-Even
Analysis Example
Figure 8.2
$180,000
$160,000
$150,000
$130,000
$110,000
$80,000
$60,000
$30,000
$10,000
|
8 - 34
dixQi
x - coordinate =
Qi
i
diyQi
y - coordinate =
Qi
i
where
Akron
lowest
cost
Chicago
lowest
cost
Bowling Green
lowest cost
500
1,000
1,500
2,000
2,500
3,000
dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods moved to
or from location i
Volume
8 - 32
8 - 35
North-South
Finds location of distribution

center that minimizes distribution
costs
New York (130, 130)

Chicago (30, 120)
120
Pittsburgh (90, 110)

90
Considers
60
Location of markets
Volume of goods shipped to those
markets
30
Shipping cost (or distance)

Atlanta (60, 40)

|
30
Arbitrary
origin
8 - 33
60
90
120
150
East-West
Figure 8.3
8 - 36
16/10/2013
Worldwide Distribution of
Volkswagens and Parts
Number of Containers
Store Location
Shipped per Month
Chicago (30, 120)
2,000
1,000
New York (130, 130)
1,000
Atlanta (60, 40)
2,000
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 2000
= 66.7
x-coordinate =
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000
= 93.3
y-coordinate =
8 - 37
8 - 40
Service Location Strategy
1. Purchasing power of customer-drawing area
North-South
New York (130, 130)
2. Service and image compatibility with

demographics of the customer-drawing area
Chicago (30, 120)

120
90
3. Competition in the area

4. Quality of the competition
Center of gravity (66.7, 93.3)
5. Uniqueness of the firms and competitors

locations
60
30
Figure 8.4
6. Physical qualities of facilities and neighboring

businesses
Atlanta (60, 40)

|
30
Arbitrary
origin
60
90
120
150
7. Operating policies of the firm
East-West
8. Quality of management
Figure 8.3
8 - 38
8 - 41
Location Strategies
Transportation Model
Service/Retail/Professional Location
Revenue Focus
Finds amount to be shipped from

several points of supply to several
points of demand
Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Solution will minimize total

production and shipping costs
Parking/access; security/lighting;
appearance/image
Cost determinants
A special class of linear

programming problems
Rent
Management caliber
Operations policies (hours, wage
rates)
Goods-Producing Location
Cost Focus
Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor; raw
material; taxes, and so on
Intangible and future costs

Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local
government
Table 8.6
8 - 39
8 - 42
16/10/2013
Location Strategies
Techniques
Regression models to determine
importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
The Call Center Industry

Requires neither face-to-face
contact nor movement of materials
Techniques
Transportation method
Factor-rating method
Locational break-even analysis
Crossover charts
Has very broad location options

Traditional variables are no longer
relevant
Cost and availability of labor may
drive location decisions
Table 8.6
8 - 43
Location is a major determinant of

revenue
High customer-contact issues are
critical
Costs are relatively constant for a
given area; therefore, the revenue
function is critical
8 - 46
Geographic Information
Systems (GIS)
Location Strategies
Assumptions
Important tool to help in location analysis
Assumptions
Enables more complex demographic

analysis
Location is a major determinant of

cost
Most major costs can be identified
explicitly for each site
Low customer contact allows focus
on the identifiable costs
Intangible costs can be evaluated
Available data bases include

Detailed census data
Detailed maps
Utilities
Geographic features
Locations of major services
Table 8.6
8 - 44
8 - 47
Geographic Information
Systems (GIS)
How Hotel Chains Select Sites

Location is a strategically important
decision in the hospitality industry
La Quinta started with 35 independent
variables and worked to refine a
regression model to predict profitability
The final model had only four variables
Price of the inn
Median income levels
State population per inn
Location of nearby colleges
r2 = .51
51% of the
profitability is
predicted by
just these four
variables!
8 - 45
8 - 48
16/10/2013
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16/10/2013

Methods of Evaluating Location

PowerPoint presentation to accompany

Locational Break-Even Analysis

PowerPoint slides by Jeff Heyl

2011 Pearson Education, Inc. publishing as Prentice Hall

Global Company Profile:

How Hotel Chains Select Sites

The Strategic Importance of

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Geographic Information Systems

2011 Pearson Education, Inc. publishing as Prentice Hall

Factors That Affect Location

When you complete this chapter you

1. Identify and explain seven major factors

2. Compute labor productivity

Political Risk, Values, and Culture

3. Apply the factor-rating method

4. Complete a locational break-even

2011 Pearson Education, Inc. publishing as Prentice Hall

When you complete this chapter you

One of the most important decisions a

5. Use the center-of-gravity method

Increasingly global in nature

6. Understand the differences between

Significant impact on fixed and

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Location and Costs

Central hub concept

Once in place, location-related

Reduces mishandling and delay in

Determining optimal facility

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Location and Innovation

The objective of location strategy is

Four key attributes when strategy is

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Key Success Factors

1. Site size and cost

Decisions made infrequently

2. Air, rail, highway, and

Decision greatly affects both fixed

Once committed to a location,

Key Success Factors

2011 Pearson Education, Inc. publishing as Prentice Hall

Key Success Factors

Wage rates are not the only cost

3. Labor availability and costs

Lower productivity may increase total cost

4. Costs and availability of utilities

Labor cost per day

6. Government incentives and

Factors That Affect

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

2011 Pearson Education, Inc. publishing as Prentice Hall

Factors That Affect

Exchange rates and currency risks

Factors That Affect